India Power Hit by Coal Shortage

India, strapped by a burgeoning need for energy, faces a major bottleneck in adequate coal supply that in turn is hurting investor interest in new power projects according to Fitch Ratings.

“India's power generation companies could be adversely affected by coal shortages, likely to persist short-to-medium term,” the ratings agency said in a recent report. “Amid uncertainties over coal supply, the investor sentiment seems to be weak, especially for new power projects.”

The country’s thirst for energy to feed its rapidly growing economy places it in a quandary. India is expected to triple its greenhouse gas emissions by 2030. And, despite the fact that its carbon emissions in 2007 were only 1.5 metric tons per capita, according to a worldwide survey by the US Department of Energy, the country has already become the world’s third-largest producer of greenhouse gases because of the giant size of its population.

Although India’s clean energy investment is forecast to grow as much as 763 percent by 2020, according to a study by the Pew Trust, coal will continue to drive industry. Its demand-supply gap will be met via expensive and possibly uncertain imports. Although Indian companies have been acquiring coal blocks in Australia, Indonesia and Africa, there will be a time lag before the supplies arrive. This is a reflection of the delayed response to rising electricity needs, unlike Chinese firms, which have moved much quicker to plug impending shortages, and which are in direct competition with Indian companies across the world in tying up coal blocks.

Importers Tata Power, Adani group, Lanco Infratech and Reliance Power are not happy about an Indonesian government move to benchmark coal prices to international indices, which could raise the cost of imported coal in India and create further inflationary pressures.

Reliance Power’s 4,000 MW Krishnapatnam ultra-mega power plant, as it is known, could feel the impact of this change. Previously Indonesian coal mines could bilaterally fix coal prices for buyers.

Fitch Projections

Delays in developing captive coal blocks allocated to the power generators are among the reasons for insufficient domestic output. A lack of environmental clearance from government agencies has hampered 4000 MW plants in Orissa and Chattisgarh. The associated mines have been classified in “no go” zones, so-called because of the damage to sensitive environmental regions from coal mining. Latest reports suggest that Tata Power’s Mundra UMPP in Gujarat that was on track could also be delayed due to the lack of forest clearance for a transmission line.

“A lower-than-expected increase in domestic coal production, particularly due to delays in the development of captive coal blocks allocated to the power generators, has added to the demand-supply gap,” Fitch said.

The monopoly coal producer, state- owned Coal India Limited is also saddled with rising inventories due to infrastructure issues such as insufficient rail wagons. The government, meantime, is faced with multiple goals of ensuring “electricity for all” and checking inflation due to immediate political fallouts.

Thus, in order to ensure lower electricity tariffs, New Delhi has made it mandatory for long-term coal supply arrangements to be fulfilled first. This benefits state-firms such as National Thermal Power Corp. rather than new power entities that are only allowed imports of up to 30 percent of requirements.

The situation has been further exacerbated by the fact that India’s gas production has failed to rise to levels that were projected due to technical difficulties faced by Reliance Industries-operated Krishna-Godavari fields in Eastern India. Power firms expecting the new gas supplies are in a lurch.

India is seeking to add 80,000 MW of generating capacity over the next five years, the bulk coal-based thermal power projects, which formed 54 percent of power capacity at the end of April 2011 and 66 percent of electricity generated in the last fiscal year.

Power Sector Alarm

Underlining the Fitch projections, entities associated with India’s power sector have warned about the impact of coal shortages on electricity generation. The power ministry recently said many of India’s new power plants are running at half capacity due to coal shortages and may default on loan repayments unless the fuel situation improves immediately.

Most of the newly-commissioned power plants are unable to meet their contractual obligation to supply power to state utilities, the power secretary wrote to the coal ministry.

Meanwhile, private power producer Adani Power, which has major generation plans and is the biggest Indian coal importer, has warned that shortages have become a “national concern.” Ravi Sharma, CEO of Adani Power, recently said: “The coal shortage is not anymore an issue for an individual company. It is a national issue.”

State Action

New Delhi has been looking at removing some of the bottlenecks in the way of improving domestic supplies. Under pressure from industry and the Prime Minister’s Office, the environment ministry has been easing its stand on its ``no go” mining areas classified as restricted forest area.

Environment minister Jairam Ramesh, who has played a major role in reforming the ministry, has cleared mining in five coal blocks in the eastern state of Orissa that will supply thermal plants including one 1,600 MW plant and another 4,000-MW project.

Ramesh, however, cautioned that producers must go about their business causing 40 percent less damage to forest areas. These no-go zones often lie in the area of dense forests where mining has been banned because of the environmental damage mining would cause. Some 35 percent of the area of nine coal fields in six states falls within these zones.

Ramesh has put the brakes on what previously was a rubber stamp ministry that handed out clearances for industrial power and other projects with no questions asked, according to environmentalists. All proposals, particularly those in the country’s dwindling forests, are now being considered on their merits, much to the admiration of the greens.

Meanwhile, the group of senior ministers that decide on major executive decisions is scheduled to meet in the second week of July to deliberate green-lighting more projects. These include six coal projects allotted to firms ADAG, Essar and the Aditya Birla Group to fuel associated TPPs that previously failed environment clearance.

New Delhi has also been cracking down on companies, including NTPC, for not developing captive coal mines. After a period of dithering and warnings, last month the coal ministry revoked mining licenses of five blocks of NTPC, Damodar Valley Corp and Jharkhand State Electricity Board with combined reserves of 1 billion tons.

The message is clear that the firms need to pull up on their performance and the stagnant output from captive blocks will no longer be acceptable.

Near Term Problems

However, the situation still does not look very healthy in the near term. India’s coal minister Sriprakash Jaiswal recently warned that the shortage is likely to more than double in next five years from 125 million metric tons at present unless production is massively increased.

(Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com)